So your Great Aunt Grace passed away and left each of her grandchildren and great nieces and nephews with a $100,000 inheritance. Let’s say you are in your mid-forties with a home and a family and the typical middle-class financial situation. You want to invest the money, rather than squander it, in respect of your aunt who worked hard so that you could have this money. What is the best way to invest to make sure that the money will last and be a blessing rather than a curse? Here are some suggestions.
Pay off your high interest bills:
There are no investments that will provide a big enough return to overcome the 18%-24% that a credit card will charge. The first thing to do with a windfall is to pay off those bills and then cut up the cards so you won’t rack up a balance again. Then, put $10,000 in a checking account with a debit card attached. Use the account to cover the float (the money needed for the time between when you pay for things and when your paycheck comes in. This is what you used to cover with your credit card between the time you made the charges and paid the bill). If you ever find yourself spending down the account and not paying it back, cut back on lifestyle and save like crazy until it is replenished. While you’re at it, pay off variable rate loans like HELOCs and Home Equity Loans.
Put some money into some mutual funds:
An easy way to invest for those who don’t want to spend a lot of time is to put money into mutual funds. With mutual funds, the two things that should concern you most are the cost of the funds and the turn-over rate. The best funds to buy are therefore index funds or index Exchange Traded Funds (ETF)s. With $60,000 to invest (the amount left after your bills are paid), I’d put $20,000 each in a large cap index fund and a small cap index fund. I’d then put $15,000 into an international fund and maybe $5,000 into a bond fund or an REIT fund. This would provide a good deal of diversification without a great deal of care and feeding.
Buy into individual stocks:
For those willing to take a little bit of time doing some research, some individual stocks can be selected and purchased in addition to mutual funds. Mutual funds will provide the steady, market returns (somewhere between 10-15% if held for many years), but individual stocks provide the opportunity to realize very large gains. The secret here is to buy stock in companies that have a lot of room to grow that have already proven themselves capable of making money through a great business. You’re looking for the next Microsoft or Home Depot which grows and splits several times over the next 20 years until they become an international powerhouse. With high interest debts paid off and $60,000 to invest, I would put $30,000 into mutual funds as described above, and then put about $10,000 each in three stocks that I considered best-of-breed in three different industries.
The first place I’d look is technology. I’d look at Google, Ebay, Facebook, Amazon, Xilinx, and other companies and see which one I thought had the best management team, as indicated by their fiscal results, and still had a lot of room in which to expand. The secret for buying individual stocks is that it doesn’t matter which is making a lot of money now – it’s which will be able to make a lot more money in the future, since that is what drives the price up.
The second place I would look is in the restaurant industry since that is where there is room for growth by opening more locations. I’d look at Chipotle Grill, Darden, BJ’s Restaurants International, Starbucks, Rare Hospitality and others to see which I thought was best positioned for growth. I would look at how many restaurants they have in different areas of the country and how many places in which they aren’t already dominant. I’d also see if they could expand internationally.
The third place I’d look is in retailers since they also have the ability to expand by adding more product lines and/or more stores. I’d look at some of the traditional stores like Kohl’s, Home Depot, Lowes, Gap, The Buckle, and Ambercrombie. I’d also look at online businesses since that might be where retail is going. Perhaps one of the physical stores also has a significant online presence that could grow. Because goods have become a commodity business, which means that everything is pretty much the same and things can be bought at a lot of different places, cost has become the dominant factor for many things. I’d therefore look for stores that sell unique things you can only get from them since they will be able to maintain higher prices, rather than racing to the bottom with everyone else.
I would assemble my list and then buy in 200-300 shares at a time, waiting after the initial purchase for a dip in price so that I could lower my cost basis (the average price I paid for the shares). I would buy in over a period of a couple of months until I had a $10,000 position, and then I would be ready to sit pat for many years, giving the companies time to grow. I would hold on until one of the companies stopped performing well in their business or grew so big that there was little room for growth, then sell out. I would also trim the position back if it grew too large – bigger than $30,000-$50,000, say. Too large is defined as big enough that it would have a significant impact on my life if the company suddenly folded.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.